Highlights of Report Number: 2010-40-034 to the Internal Revenue Service Commissioners
for the Small Business/Self-Employed Division and the Wage and Investment
Division.

IMPACT ON TAXPAYERS

For Tax Year
2007, approximately 40,000 taxpayers filed a U.S. Return of Partnership Income
(Form 1065) and an additional 350,000 taxpayers filed a U.S. Individual Income
Tax Return (Form 1040) with a single Profit or Loss From Business (Schedule C).
These taxpayers could have potentially benefited by electing to use the Qualified
Joint Venture (QJV) filing option.The
QJV option allows taxpayers to bypass the filing of Form 1065 and the
associated Supplemental Income and Loss (Schedule E) and only file two
Schedules C and two Self-Employment Tax (Schedule SE) with their Form 1040.Married individuals filing a single Schedule
C may allocate the Schedule C income. Thus both individuals receive Social
Security credit.

WHY TIGTA DID THE AUDIT

This
audit was initiated to determine whether taxpayers who potentially qualified
for the QJV filing option were adequately informed of the election and the
potential benefits it provides.

Previously,
married individuals in a business together were considered partners and required
to file an annual Form 1065 as well as a Form 1040 return.The QJV option simplifies the filing
requirements by allowing husband-and-wife businesses to be treated as sole
proprietorships rather than partnerships for tax purposes.The option also helps to ensure each spouse
gets proper Social Security credit.

WHAT
TIGTA FOUND

Many
potentially qualified individuals were not aware of the QJV filing option.Of the respondents to our survey who filed an
annual Form 1065 but qualify for the QJV option, 85 percent were not aware
of the option.A smaller percentage of
the Form 1040, Schedule C, filers qualified for the QJV option; however, of
those who did qualify, 80 percent were not aware of the option.In both categories, most of the taxpayers who
were not aware of the option said that they would consider using it in the
future.

The Internal
Revenue Service (IRS) did not clearly present the new tax law provision in some
of its publications or provide sufficient outreach to emphasize the new tax law
change to the paid preparer community.Furthermore, tax preparation software packages did not adequately prompt
or notify preparers about the new provision.

WHAT TIGTA RECOMMENDED

TIGTA
recommended that the IRS ensure all tax products, including those on the IRS.gov
web site, that include a discussion on QJVs are clear and accurate and include explanations
on partnership status and potential spousal benefits when electing the QJV
option.

The
IRS should also work more closely with the tax preparation software vendors to
help ensure tax preparation software packages are adequately alerting taxpayers
and paid preparers about the QJV election.An outreach marketing plan should be designed for husband-and-wife
businesses and tax practitioners to ensure they are aware of the QJV election
and its potential Social Security benefits and reduction of taxpayer burden.

IRS officials agreed with all of our recommendations.They are committed to improving their current
efforts to provide clear and understandable information regarding the QJV
filing option.They plan to update their
publications and forms, update the content on the IRS.gov web site to ensure it
is accurate and understandable, and enhance their marketing efforts to software
industry professionals.They also plan
to undertake an effort to ensure the spousal elections, and their impact on Social
Security benefits, are clearly communicated to the appropriate taxpayers.

READ THE
FULL REPORT

To view the report,
including the scope, methodology, and full IRS response, go to: